Princeton Review Vs. Kaplan: Enemies, a Love Story (1995 Interview)

The test-prep-industry catfight between onetime upstart the Princeton Review and longtime leader Kaplan Educational Centers proves one thing above all else: a hated competitor can be a company's best friend.

In the middle of a meeting, John Katzman glances out his third-floor window to see a city bus roar down Broadway. The ad on its flank announces, "Take Kaplan and Get a Higher Score." Katzman glares and then takes a deep breath to collect himself. "It makes me crazy to see that," says the chief executive and founder of the $50-million Princeton Review, a test-preparation company based in New York City. Katzman's arch rival, Kaplan Educational Centers, has a knack for needling him, he admits. But plastering its logo on the bus that drives up and down his avenue all day long is downright cruel.

"I don't like to see their advertising. I don't like to read their press. I don't like to see or hear the word Kaplan," he explains. "It's like an irritant. I have a bad reaction."

This from the man whose company once advertised that "friends don't let friends take Kaplan," who appropriated Kaplan's name on the Internet so he could post "horror stories" about his competitor, who just recently faxed questionnaires to Kaplan offices around the country goading Kaplan partisans with questions like "Why do you think the Princeton Review is beating Kaplan so badly?"

Of course, Katzman's counterpart, camped little more than a mile away in midtown Manhattan, just beams to hear that his ads have riled his rival. "If seeing the Kaplan name makes him angry, he must spend a lot of his waking hours in a rage," says Jonathan Grayer, the 30-year-old marketing whiz appointed Kaplan's CEO last year. An aggressive ad campaign in New York has the Kaplan name bedecking billboards, buses, and subways all over the metro area. As Grayer sees it, Katzman's company is getting its comeuppance. "They've spent years getting in our face, running rude ads like 'Stanley's a wimp' or 'Stanley's finally lost it" -- taking in vain the name of industry father and company progenitor Stanley H. Kaplan. "They've run ads that made my blood boil," notes Grayer. "Now the battle is engaged. We're mad as hell, and we're not going to take it anymore."

The two sides do agree on one thing: in this battle of the testmasters, a truce is nowhere in sight. There will be no strategic alliances or joint ventures or pseudopartnerships here, thank you. "They have only utter loathing for each other," comments one former instructor. "And they like it that way."

The simple truth is that their mutual contempt may be the best thing that ever happened to either company. Despite the animosity -- Katzman refers to Kaplan's management as "those humorless cheeseballs"; Grayer dismisses Katzman as a "rebel at any cause" -- this is a regular bowl game to watch and perhaps the best evidence yet that having a nemesis can be a beautiful experience. An honest-to-God gift. Not just to customers, the obvious beneficiaries, but to the warring parties themselves: what team, after all, doesn't play better against an opponent it positively despises?

Let's forget for a moment the minor inconveniences that result from fierce competition: the churlish ads, the spying, the bad-mouthing, the talent stealing. Trash talk is all in a day's work. OK, so maybe there's the occasional ambush, although Princeton denies ever sending operatives to disrupt a Kaplan class. ("Even if we did, who would notice?" Katzman speculates.) Let's overlook the issues of Dumpster security: Kaplan refutes the suggestion that its employees ever picked through its competitor's trash in search of customer names. So there's a little price pressure? And a chronic tug-of-war over market share? Quit whining. A competitor that stalks you also spurs you on. In a heated rivalry, you finally find that special someone -- to copy, to conquer, to kvetch about. With enemies like this, who needs friends?

* * *

"Our company invented the industry, and we're back to claim what's rightfully ours," explains Kaplan's Grayer. Founded by Stanley H. Kaplan in 1938, the company Grayer now runs spent nearly half a century developing the market for its test-coaching services and building a national chain, to become the country's largest test-prep business. Then a young punk, not long out of Princeton University and packing a 1500 SAT score of his own, burst onto the scene to steal a slice here and a slice there from Kaplan's previously uncut tart.

Throughout the 1980s Katzman's new company posted runaway sales growth (landing on the Inc. 500 four times). By 1986 the Princeton Review had chipped away at Kaplan's near-monopolistic reign and had grabbed as much as half of its SAT business.

Katzman and company pressed their incursions into Kaplan's market with a guerrilla's fervor and a frat boy's sense of fun. They picked fights with the Educational Testing Service (ETS), which administers the standardized tests that the test-prep companies coach students to take, and earned a reputation as a cheeky champion of students' rights, an image that sold well to the SAT set. They fought and won a costly court battle against ETS over whether their coaching methods constituted cheating. They skewered the competition with mocking ads. They deployed smart, competitive, mischievous troops who thrilled at beating Kaplan in a hundred tiny ways. "We were the bad boys in the industry," says Katzman with a proud grin.

Come the 1990s, the industry began to change. After a decade of robust expansion, overall market growth tapered as the baby bust matured. The Princeton Review had taken the lead in the SAT market. (It claims to hold 40%, to Kaplan's reported 20%.) And it was gaining ground in the grad-school-exam market, where Kaplan's dominance (the company still holds a 60% share) had begun to erode.

The besieged Kaplan empire, facing the double threat of adverse demographics and a rapidly growing competitor, began to strike back. "We decided we would no longer allow the Princeton Review to 'run wild' in the industry," says Grayer. "They needed to be disciplined."

* * *

"If it weren't so arrogant, it would be pathetic," scoffs Katzman. "Before, they were sinking in the quicksand. Now they're flailing in it." Kaplan remains the biggest player, with $80 million in annual revenues. But it has not posted a profit in three years, Katzman points out. The Washington Post Co., which bought Kaplan in 1985, reports losses in excess of $15 million for the division of which Kaplan is the largest part. Although Grayer predicts the ink will run black this year, Katzman remains skeptical. "They've been saying that for three years," he says. "Some turnaround."

Though the clever Mr. Katzman is loath to admit it, he owes no small part of his success to Kaplan, the industry leader that pioneered the market in the first place and then foolishly left so much of it for him to pocket. Usually, a competitor's mistakes are mere opportunities. For Katzman, Kaplan's missteps and weaknesses were like the photo negative for a business plan. The question of which market to pursue hardly stumped him. "That was easy," Katzman says. "There was a monopoly in test prep, run by a guy who was doing it all wrong."

"From the beginning we knew what market was there to take because Kaplan had defined it for us," says Matt Rosenthal, president of Princeton's New England franchise. "We looked at Kaplan and said, 'Whatever they have, we could have."

Every strategic ploy was specced according to the competitor's flaws and habits. Princeton set out to offer smaller classes and livelier instructors as an alternative to classes that one former Kaplan student labeled "dull as dirt." Pricing was simple enough: charge what Kaplan charged and then some. The market leader supported a price floor in the industry that enabled Katzman to charge a premium. When it came to positioning the company, Princeton let the word go forth: We're not Kaplan. We're entirely too smart and too cool to be confused or compared with Kaplan. Princeton forged its young identity as the anti-Kaplan cabal out to raise student test scores and raise a little hell, to boot. It was all good, not-so-clean fun, especially since Kaplan had coaxed, if not "coached," Princeton's Katzman into the business. There was less random guessing for the upstart, thanks to the existence of the company he loves to hate.

Of course, the delicious irony of Kaplan's latest ad campaign is that it cops Princeton's pitch so blatantly. It touts small classes, individualized instruction, exciting teachers -- the very selling points Princeton first employed to differentiate itself a decade ago.

"It's depressing to see someone ape you with so little panache," laments Katzman. "It's sort of like seeing yourself played in a movie by someone with no talent or looks -- you're flattered but somehow annoyed."

* * *

The ads' eerie familiarity is not nearly as infuriating as their success: Kaplan booked 25% more revenues in metro New York last year, the company reported. Grayer credits the ad campaign, which promoted his "underleveraged brand," for the boost.

The former master appears to have learned a trick or two from its former student. And not simply in marketing. Although Kaplan handed Princeton its market, Princeton spurred Kaplan to improve the quality of its product: revamp its curriculum, recruit better instructors and train them more, reduce class sizes, and enhance customer service. It's no coincidence that Kaplan started to make and sell a better widget. Or that it began to diversify its line with book products and on-line services once Princeton had marked the trail.

The fierce and focused competition has left no room for complacency. Both Kaplan and Princeton are compelled to innovate continually, embrace new technologies, and seek competitive advantages and expansion opportunities outside their current market. They look for tomorrow's customers today: Both operations are wired. Both are racing to deliver more products and services on-line. Both are pushing into educational software, a front that promises to be lucrative and hotly contested. And each is driven in no small part by the specter of the other's getting there first.

Princeton now has a handful of software products in retail distribution. Katzman's company has poured a few million dollars of its earnings into staking that new ground. Kaplan, Katzman is quick to point out, has no software products on the retail shelves. "With luck, we can pen them into the course business," says Katzman, laying out his strategy for tomorrow's rounds, "and surround them."

Employees are hardly innocent bystanders. Call a Kaplan Educational Center, just mention the words the Princeton Review, and see what happens. Prepare for a diatribe. Call a Princeton Review Center and whisper Kaplan. Expect scorn. Much of the battle between the two companies gets fought on the ground, where every customer is a trophy to be won, sometimes wrestled from the competitor's grip.

The effect that has on morale cannot be underestimated: employees show signs of giddiness, unnatural loyalty, and obsession. Consider the case of Andrew Lutz, director of research for Princeton, who hung this customized headline over his desk: "TPR [The Princeton Review] firebombs Kaplan's. Employees flock to A. Lutz." Even the fantasy life of A. Lutz appears to be occupied with kicking Kaplan's butt. His boss couldn't be more pleased.

* * *

Doesn't this get pathological at a certain point? Oh, probably. Customers might enjoy a good duel now and again, but no one likes to watch one company pull a Tonya Harding on another. And too much mischief, as Katzman can attest, fires up a competitor all the more.

While the Kaplan/Princeton crossfire has so far succeeded in raising industry visibility and strengthening the companies' respective brands, there is always the risk of escalation and retaliation. Or worse, litigation -- the surest way to ruin a perfectly good rivalry. Indeed, for two years the combatants have been embroiled in lawsuits alleging false or misleading advertising. They remain in arbitration, and although that's less costly than the courts, combined legal costs have already topped $500,000. Katzman's Internet caper, for instance, cost him at least $30,000 in legal fees. He admits that his pranks sometimes serve no lasting strategic purpose. "Just to piss them off," he confesses. "But it's a hobby."

If the contestants manage to confine their brawling to the streets and keep it out of their lawyers' offices, perhaps their rivalry will survive intact. Its fans can only hope. After all, you have every reason to love your enemy. And pass the ammunition.

THE SPOILS OF WAR

Animosity has its advantages. The benefits to an aggressive company that targets an equally combative competitor include --